Abstract

Hundreds of documents released from DOE under a Freedom of Information Request and subsequent litigation shed new light onto DOE's management of an $8.33 billion loan guarantee on offer to support the construction of two new nuclear units at the Vogtle reactor in Georgia. The documents raise questions about how project risks were screened, the loan terms in the conditional committment agreement provided by DOE, the adequacy of the credit subsidy payments from borrowers to the US Treasury under the deal, and involvement by political appointees focused on getting the deal done.

Earth Track and Synapse Energy Economics have conducted a preliminary review of hundreds of documents associated with the $8.33 billion conditional loan guaranteescommitted by the U.S. Department of Energy (DOE) for the construction of two proposed Toshiba-Westinghouse AP1000 nuclear reactors, Vogtle 3 and 4 (the Vogtle Project) in Georgia. Covering a period between June 2008 and March 2010, these documents were released as a result of a Freedom of Information Act (FOIA) request by the Southern Alliance for Clean Energy (SACE) and subsequent litigation with DOE.

Our goal was to learn more about 1) DOE's due diligence and risk assessment performed on the Vogtle Project, 2) the terms offered on the loan guarantees, and 3) potential conflicts of interest among involved parties. Although the loan guarantees have not been formally accepted by borrowers-even as DOE has extended its offer for the conditional loan guarantees into 2013-our review of related documents highlights a number of areas of concern. This review is limited to the Vogtle Project loan guarantees; we do not address the economics of the entire project, as there are multiple other subsidies, in addition to the loan guarantees, that artificially bolster the viability of these proposed reactors.

Important findings of our review include:

The Term Sheets released thus far by DOE indicate credit subsidy payments that appear far too low to offer adequate protection to taxpayers in the event of a default. Even the high estimate for Georgia Power ($52 million), for example, would add only about 1/8% to borrowing costs over the life of the loan.

DOE has outsourced so many important risk oversight functions that the government's ability to properly structure and monitor the deal may be insufficient.

Modification of credit subsidy assessment tools continued well past the time that credit subsidy estimate letters were sent to borrowers.

E-mails indicate periodic involvement by the Secretary of Energy on loans and loan terms, and by the White House and top levels of Department of the Treasury on other issues related to the Vogtle Project.

The construction of two new nuclear reactors is a high-risk project. Not only is there a long history of cost overruns on nuclear projects throughout this country and the world, but increasing competition from other forms of electric power generation (including natural gas) has already led to many nuclear projects in the U.S. being delayed or canceled. Despite these risks, however, DOE's loan guarantees for the Vogtle Project are structured more along the lines of a routine infrastructure investment.

Absent the loan guarantees, if financing for the Vogtle Project were possible at all, its form would be quite different, and considerably more expensive. Expected differences would include the use of less debt financing and more equity from the project owners, as well as the application of venture-capital type approaches requiring much higher returns on invested capital and substantially stronger alignment of the incentives of investors and managers with the long-term success of the venture. Given the history of cost overruns in the nuclear industry and the emergence of cost overruns on the Vogtle Project already, we would not expect traditional project finance models with high debt and payments secured only by project (rather than corporate) revenues to be available.

These distinctions matter. The use of highly leveraged, government-guaranteed financing for such a large investment-one with uncertain costs and an uncertain completion schedule-creates particular management challenges and U.S. taxpayer risks. Although the federal government has many credit programs, the Vogtle Project loan differs from other programs in important ways:

The loan guarantees are much larger than the average loans made through other federal agencies, for other Title XVII borrowers, and the average funding levels for private venture capital investments.

DOE's loan guarantee program is not time-tested, but rather has been cobbled together quickly through evolution of Title XVII of the Energy Policy Act of 2005.

Structural elements of the program include: 1) large amounts of money, 2) only a few "winners" getting most of the money, and 3) a non-transparent analytic and decision-making process. This combination puts the program at high risk for corruption or political interference.

In light of these factors, review of DOE's process for evaluating project risks and credit subsidies is particularly important in order to protect taxpayers. This report summarizes our findings in the following four broad categories: loan process findings; financial terms of conditional guarantees; important risks in DOE's credit subsidy analysis, and political interference with financial decisions. A number of areas for further research are also identified.